Consumer Wise: Fixing bad credit

Payment history is the single most important factor making up your credit score, accounting for 35 percent of the total. But four other factors have an impact, as well, and should be scrutinized as you work to improve a low credit score.

People with bad credit could get a boost in their credit score this summer thanks to some changes the credit bureaus are making, but consumers who are serious about improving their credit scores can do a lot more to help themselves.

Jonathan Drapeau has been working to improve his credit score for the past six months, so he can buy a house.

"My credit score went up 72 points. It was 595 and now it is at about 670 and growing," Drapeau said. “Now I’m in the range to buy a house with a conventional loan.”

Your credit score is the most important number in your financial life. It impacts everything from buying a house to getting a car loan, even getting a new job.

Most lenders won’t consider you for a mortgage unless you have a score of at least 620 to 640. So, improving your score — especially if it's under 640 — should be a top priority.

Help for Consumers

Starting this month millions of consumers could see an unexpected boost in their credit scores, because the three national credit bureaus, Equifax, Experian, and TransUnion, stopped including negative information like civil judgments and tax liens on credit reports, unless they can clearly confirm a person’s identity. The dings will be removed if the data does not include a person's name, address, Social Security number, or date of birth.

The action comes following consumer complaints and a settlement in 2016 with 31 state Attorneys General over problems with credit reporting accuracy and difficulty correcting errors on credit reports.

The changes are an effort by the three credit reporting agencies to make credit reports more accurate and to make it easier for consumers fix mistakes.

About 12 million people nationwide are expected to see an increase in their credit score of about 10-to-20 points. Another 700,000 could see an increase of 40 points or more.

Changing Habits

Credit counselor Juan Menendez with Solita’s House in Tampa says the changes by the credit bureau are good news and will help the consumer, but don't expect a huge difference if you have a low score.

"There's gonna be a positive on their credit record, but at the same time, if there's a lot of negative there, that will outweigh the positive," Menendez said. “For instance, if you have a very low credit score — say in the 400s, it’s really not going to make a difference, because you’re still going to have a score below that magic mark that hits 620/640.”

You're better off taking your own action to help increase your credit score.

Credit Score Factors

Payment history is the single most important factor making up your credit score, accounting for 35 percent of the total. Even one late payment can impact your score significantly.

"Pay your bills on time," Menendez said definitively.

Five major factors in all impact your credit score, including:

Payment history — 35 percent

How much debt you have versus your debt limit — 30 percent

How long you've had credit — 15 percent

The types of credit you use — 10 percent

How often you apply for credit — 10 percent

Debt/Limit Ratio

When it comes to your debt-to-limit ratio it’s a good idea to keep your use of any credit account to 30-percent or below the limit. That means pay down your balances, as much as you can.

“If you can’t do 30-percent and you’re at 80 percent, try to do 50. That definitely will improve it,” Menendez said.

If you pay off a credit card, it’s actually not a good idea to close out the card. That dings your credit, too.

“You have the potential to use your credit card. You still have good credit with that particular creditor. It counts in your favor. Once you close it, it does not,” Menendez explained.

Applying for Credit

Be careful how often you apply for credit credits. Don’t apply for too many in a short period of time. Every time you do, an inquiry is sent to the credit bureaus, which counts against your credit score.

"One hard hit is not gonna make a heck of a lot of difference,” Menendez said, “but several I would say more than four in a month, is gonna make an impact of several points on your score.”

Also, when you need a mortgage or a car loan, be sure to shop for rates within a reasonable period of time, so you only get dinged once. Those types of repeated inquiries are only counted once if they occur within a 30-to-45 day window.

Check Your Credit Report

It’s important to check your credit report regularly. You are entitled to get a free copy of your credit report, every year, from each of the three credit reporting agencies.

If you're applying for a major purchase, it's a good idea to get all three at once and review them for any problems. If you're just doing a regular check, it's a good idea to spread out your free reports and get one every quarter.

Annualcreditreport.com is the site authorized to give you a free copy of your credit report, every year. You will have to pay extra for your credit score.
Some sites like Credit Karma and Credit.com will give you your credit score for free, but generally you have to provide personal information to them first.

Be sure to review your credit report for any mistakes and if you find something wrong, dispute the incorrect information.

Don't worry about ordering your own credit report to review it for mistakes or even an employer checking your credit. Those are considered soft hits and should not impact your score.

Stay Focused

Fixing bad credit does take time. How long depends on how low your score is and how much damage is already done.

“If you have student loan defaults, repossessions, or a default on your mortgage, that’s going to count a lot more than being late on a medical bill or being late on a credit card for a couple of months,” Menendez said.

Improving your credit score is not always easy, but it can be done.

"It took a lot of discipline," Drapeau explained. "It's budgeting — every little penny you can save helps and really cut down on expenses, every month."

It's all about building good habits over time, so you can show a history of responsible behavior to creditors. Be disciplined. Stick to it. And don't give up!

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